A Fresh Take on Clean Energy Incentives

December was a busy month for the senior senator from Montana. Just hours before announcing his early departure from the Senate to become the U.S. Ambassador to China, Sen. Max Baucus, chairman of the Senate Finance Committee, released a so-called discussion draft of possible reforms to existing energy tax provisions. While opinions vary about the viability of the proposal, and whether Congress actually has the appetite for undertaking tax reform in 2014, Baucus’s proposal is the first serious effort to reform energy tax in many years, and it’s likely to receive much attention this year.

The proposal extends existing tax provisions, but, more importantly, establishes tax credit rates based on carbon benefits. The plan attempts to create order from what is now chaos, where technologies receive different tax credits of varying duration and value, and where short-term extensions result in more generation by solar and wind at the expense of base load resources with longer development lead times. For readers looking to wade into the details, you can find bill language, a summary of the proposal and an analysis at www.finance.senate.gov.

For the rest of you, here’s what the proposal means in a nutshell (with a huge thanks to Washington council Ernst Young for providing a helpful analysis):

The proposal extends many currently expired credits (including the biomass open-loop credit) through Dec. 31, 2016. Importantly, the "beginning of construction" rule under Section 45, enacted earlier this year in the American Taxpayer Relief Act, would return to a "placed-in-service" requirement for facilities placed in service between Jan. 1 and Dec. 31, 2016. Thereafter, it’s a whole new world, with the creation of two broad categories—one for production of clean electricity, and the other for the production of clean transportation fuels. In both cases, eligible taxpayers would be allowed to elect between either 10 years of production tax credits (PTCs), or an investment tax credit (ITC) for a new facility. The value of the PTCs or ITC would be calculated using a formula that represents the various environmental attributes associated with the technologies. When the nation achieves certain environmental objectives, the proposal would phase down the value of the production and investment credits.

For electricity, any facility producing power that is 25 percent cleaner than the average for all electricity production in 2013 will receive a tax credit. The cleaner the facility, the larger the credit. Cleanliness is defined by the ratio of the carbon dioxide emissions of a facility per kilowatt hour (kWh) generated, as determined by the U.S. EPA. In the case of electricity produced from biomass, the measurement of carbon dioxide emissions per kWh is calculated based on net emissions, with Congress deferring to EPA and the Internal Revenue Service on how to make that calculation. A careful analysis of the staff summary seems to suggest that different biomass feedstocks may have different credit rates. For example, landfill gas receives full value similar to wind and solar, with solid wood waste and agricultural byproducts receiving partial credits.

Unlike the existing ITC of 30 percent, the maximum ITC for a zero-emissions facility is 20 percent of the cost of the investment. Generally, the clean electricity ITC cannot be claimed for facilities that begin to operate before Jan. 1, 2017. However, after 2016, a 20 percent ITC can be claimed for existing facilities that undertake a carbon capture and sequestration retrofit that captures at least 50 percent of carbon dioxide emissions.

Regarding how the credits might be monetized, going forward from January 2017, the incentives would take the form of nonrefundable general business credits, with a one-year carryback and a 20-year carryforward. Also important to note, the current rule limiting PTC eligibility to electricity sold to a third party would be eliminated, and electricity consumed on site could potentially generate production credits if the amounts are appropriately metered.

On the fuel side, the proposal attempts to consolidate the numerous current fuel provisions into one PTC/ITC mechanism that mirrors the electricity generation regime.

The Biomass Power Association is preparing written comments, which are due Jan. 31. We applaud Sen. Baucus and his staff for taking an important first step in correcting the deficiencies of existing law, and proposing a solution that clearly recognizes the carbon benefits of biomass while creating long-term certainty. But as always, the “devil is in the details.”